In this list
Electric Power

FERC orders ISO-NE to nix new power suppliers' ability to 'lock in' capacity prices

Natural Gas | Energy | Electric Power | Renewables | Oil | Coal | Emissions | Energy Transition


Energy | Electric Power

Platts Forward Curves – Gas and Power

Metals | Coronavirus | Steel

16th Steel Markets Asia Conference

Energy | Oil | Petrochemicals | Crude Oil | Refined Products | Gasoline | Fuel Oil

Indian state refiners ponder joint crude purchases as surging prices bite

Energy | Electric Power | Energy Transition

Insight Conversation: Steve Cunningham, geo

FERC orders ISO-NE to nix new power suppliers' ability to 'lock in' capacity prices


Price locks 'result in unreasonable price distortion'

Discontinuation to start in FCA 16 for 2025-26

Existing price-locked resources to retain price taker role

Washington — The Federal Energy Regulatory Commission has found that ISO New England's capacity market rules allowing new entrants to "lock in" their initial clearing price for seven years are no longer just and reasonable, and directed the grid operator to remove the price lock and associated zero-price offer provisions from its tariff.

Not registered?

Receive daily email alerts, subscriber notes & personalize your experience.

Register Now

An analyst with S&P Global Platts Analytics expects the change to prove most challenging to plans to develop new natural gas-fired units in New England.

New power suppliers in ISO-NE, since the inception of its forward capacity market, have been able to lock in their first-year forward capacity auction clearing prices and bid into subsequent auctions as price takers, which submit offers at a price of zero, during the lock-in period to ensure they clear. That lock-in period was initially five years but was extended to seven in 2014 to aid with project financing and investor assurance as the region faced potential capacity shortages and a decline in capacity market participation by new resources.

Price-locked generators forego receipt of higher clearing prices in later FCAs but mitigate any downward price risk. The New England Power Generators Association, Exelon and Calpine filed complaints with FERC in 2013 and 2014, arguing that the rules unfairly gave new suppliers a windfall while reducing potential payments to existing suppliers in the entry and post-entry capacity auctions (EL14-7, EL15-23).

Paper hearing

FERC rejected those complaints, but the DC Circuit Court of Appeals ruled in 2018 that FERC failed to adequately explain why it did not order ISO-NE to implement an offer floor for its seven-year price-lock despite previously rejecting PJM Interconnection's effort to remove the offer floor for its three-year price-lock period (New England Power Generators Association v. FERC, 15-1071, 16-1042).

In a July 1 order on remand, FERC preliminarily found that the new entrant rules were no longer just and reasonable. But given the more than five years since the complaints were filed and substantial changes to the FCM made during that time, the commission opted to provide parties an opportunity to refresh the record.

It launched a paper hearing (EL20-54), which posed questions for parties to address in briefs in an effort to evaluate the continued need for the price lock, the option of retaining the price lock and adding an offer floor and whether to impose an alternative replacement rate.

FERC, in a Dec. 2 order, found that the new entrant rules "result in unreasonable price distortion."

"Based upon the record, we find that the FCA price assurance that the commission previously found necessary in approving these rules is no longer required to attract new entry," the order said. "Consequently, the benefits provided by the price certainty afforded by the new entrant rules for new capacity resources no longer outweigh their price suppressive effects."

Analyst's view

FERC's order "is likely to pose the biggest challenge to future gas-fired generation," Kieran Kemmerer, power market analyst with S&P Global Platts Analytics, said in an email Dec. 3.

"In recent years, several large projects have benefitted from 'locking in' capacity clearing prices that proved to be well in excess of future clearing prices. That being said, as was stated by ISO-NE and others, sophisticated and liquid financial instruments are available to help mitigate the risks that the price lock mechanism was intended to defer," Kemmerer said.

He added that "while eliminating the price mechanism poses additional challenges, in New England the primary obstacle to new gas build will be policy and permitting, as the region looks to decarbonize its supply of electricity."

The termination of the price lock will not impact price-lock agreements in effect prior to issuance of the order, FERC said in its order. Rather, ISO-NE was directed to submit a compliance filing within 60 days that strips the price lock and associated zero-price offer rule for new entrants starting in FCA 16, which is slated to be conducted in February 2022 for the 2025-26 delivery year.

Existing price-locked resources will retain their ability to offer into FCAs at zero until their price lock expires. FERC agreed with ISO-NE and its market monitor that "a recently cleared resource would likely have lower going-forward costs than the marginal resource, making it inframarginal." As such, the commission reasoned that offering at zero would be "consistent with their likely going-forward costs and yields an FCA clearing price reflective of a competitive market," according to the order

FERC also agreed with the grid operator and market monitor's assessment that "adopting an offer floor would unnecessarily complicate the FCM and have detrimental consequences." Thus, FERC rejected NEPGA's request for a soft offer floor for the remaining resources with a price lock.